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BANCO DE LA CIUDAD DE BUENOS AIRES

BANCO DE LA CIUDAD DE BUENOS AIRES

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BANCO DE LA CIUDAD DE BUENOS AIRES

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  1. BANCO DE LA CIUDAD DE BUENOS AIRES Unveiling monetary policy in Latin America May, 8th of 2008 Federico Sturzenegger President Banco Ciudad de Buenos Aires Ernesto Talvi Executive Director CERES

  2. Banco Ciudad de Buenos Aires Inflation has fallen dramatically Weighted average of inflation for selected Latin American countries* * Argentina, Bazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela

  3. Banco Ciudad de Buenos Aires Inflation has fallen dramatically Weighted average of inflation for selected Latin American countries* * Argentina, Bazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela

  4. Banco Ciudad de Buenos Aires Volatility of output has fallen as well Standard deviation of cyclical component of GDP Weigthed average of selected Latin American countries* * Argentina, Bazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela

  5. Banco Ciudad de Buenos Aires Even exchange rate volatility has fallen Weighted average of standard deviation of nominal exchange rate for selected Latin American countries* * Argentina, Bazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela

  6. Banco Ciudad de Buenos Aires What is the role of monetary policy in these changes? • That´s too difficult of a question to answer • But can we at least describe monetary policy? • This is also not so easy, as there are de facto and de jure regimes

  7. Banco Ciudad de Buenos Aires How could we characterize monetary policy? • A common representation is a Taylor rule • Taylor´s (1993) equation: • But not really … Orphanides (2001)

  8. Banco Ciudad de Buenos Aires How could we estimate a Taylor rule? • Just run a regression: wrong • Do IVs (Gali and Gertler, 2000) • But this is too volatile • Use a structural model • This means taking a GE model and estimating all the equations jointly • Lubik and Schorfheide (2007) do it and have lent us their codes

  9. Banco Ciudad de Buenos Aires What is the model? • It follows Gali and Monacelli (2005) • It is an open economy general equilibrium keynesian model which is summarized by three equations • Dynamic IS-LM curve • Phillips curve • A Taylor rule

  10. Banco Ciudad de Buenos Aires Interpreting our Taylor rule • Anti inflation coefficient • Output motive coefficient • Fear of floating coefficient • CB reaction coefficient

  11. Banco Ciudad de Buenos Aires General results

  12. Banco Ciudad de Buenos Aires These policies are a change from the past

  13. Banco Ciudad de Buenos Aires What do individual country stories tell? Brazil

  14. Banco Ciudad de Buenos Aires Mexico

  15. Banco Ciudad de Buenos Aires Chile

  16. Banco Ciudad de Buenos Aires Peru

  17. Banco Ciudad de Buenos Aires Uruguay

  18. Banco Ciudad de Buenos Aires Venezuela (ER unofficial)

  19. Banco Ciudad de Buenos Aires Colombia

  20. Banco Ciudad de Buenos Aires Ecuador

  21. Banco Ciudad de Buenos Aires Argentina

  22. (-1.850) (-1.920) (2.768) Banco Ciudad de Buenos Aires Implications for times of crisis • In Ortiz, Ottonello, Sturzenegger and Talvi (2007) we looked at the impact of monetary (and fiscal) policy on output in a SSS • We first compute as the dependent variable the output performance during SSS, as described by the (output) peak to trough variations ( ). • We then related our measures of monetary (and fiscal) policy to output performance by performing simple OLS regressions • We measured relative toughness of policy by the ratios of the coefficients in the Taylor rule

  23. Banco Ciudad de Buenos Aires Monetary policy and crisis resilience • The result above suggests that a decline in the ratios leads to lower output declines in crises • Argentina, Brazil, and Colombia appear to have gained flexibility • Chile, Ecuador, Mexico and Peru, not

  24. Banco Ciudad de Buenos Aires Conclusions • A proper characterization of monetary policy is possible • It shows a switch toward inflation objectives away from the exchange rate • Very solid and very stable in most countries • The exceptions are Ecuador and Argentina • Whether the new configuration of monetary policy has prepared Latin America better for a crisis is still an open question